India’s orientation to major government involvement in industrial development can be traced back to the committee with the then top industrialists, Purushottam Das Thakurdas, J.R.D. Tata, G.D. Birla, Ardeshir Dalal, Shri Ram, Kasturbhai Lalbhai, A.D. Shroff and John Mathai, formed in 1942. It proposed the ‘Bombay Plan’ for India’s economic development. The industrialists said, “no development... will be feasible except on the basis of a central directing authority”. This meant directing investment to desired areas.
The plan proposed doubling per capita income within 15 years. Industrial productivity had to grow by five times, and industrial planning had to be focused on the development of capital goods industries. The Centre was to invest heavily in starting industrial enterprises. These were basic and key industries — transport, pharmaceuticals, armaments, aircraft, cement, steel, aluminum, machinery, power and the like. (State governments soon started their own.) Most of the funding would be raised by the government, especially from borrowings abroad. Private investment would be directed into desired directions through industrial licensing.
Professional management in India was not well developed at the time. The only trained cadre was the civil services that administered the country. Civil servants were drafted to set up and run these State-owned enterprises. A few non-bureaucrats were brought in — D.V. Kaput, V. Krishnamurthi, Prakash Tandon, Yogi Deveshwar and the like. But there were few such, and the bureaucracy developed remote control of the SOEs through rules, procedures and many approvals. Although over time, the enterprises developed their management cadre, the administration continued to exercise great control over them.
With liberalization from 1985 and the abolition of licensing from 1991, private investment entered sectors reserved for government enterprises. Public sector monopolies were broken. The SOEs faced competition. However, their inflexible mandates limited them to defined sectors. They could not diversify to improve profitability. The detailed controls by administrators in the government over the SOEs, on their expansion, diversification, technology imports and collaborations, royalties, building brand images through product quality, service, pricing and advertising, continued. These stunted managerial innovation and corporate growth. A culture of defensiveness, avoiding risk-taking and errors of judgment and losses, developed in the SOEs. The three C’s — the CBI, the CVC, the CAG — were deterrents to bold decision-making in the SOEs. The private sector is more tolerant of loss-making mistakes (provided they do not happen too often).
There are many examples of SOEs that fell behind as a result. Air India was prevented from replacing old airplanes for over 10 years while private competitors took over profitable routes. Then it was compelled to buy planes for which Air India had no plans for utilization. Bharat Heavy Electricals Limited failed to upgrade its product technologies, resulting in loss of much business, especially for more advanced equipment, to foreign producers (China is a major example). It has failed to deliver equipment in time. Expansion of power supply and equipment breakdowns among users was the result.
Coal India, the most profitable SOE, supplies low quality coal, and misses supply commitments. The result — damage to expensive turbines; heavy shortfalls in power generation and fertilizer production; imports at much higher costs; consequent higher costs to the economy and the consumer.
Defence enterprises were prevented from or made to postpone acquisition of technology. High imports of defence equipment benefited import agents and their local touts. The country, in spite of its acclaimed engineering and software skills, imports a major part of its defence requirements because of government restraints on indigenous production. Hindustan Machine Tools’ inability to keep pace with the modern electronic age made it a sick company. Bharat Electronics survived by supplying the non-government market and technology innovation. It was a rare exception.
National Thermal Power Corporation missed every plan target for new generation capacity mainly because it did not develop EPC (engineering, project, construction) capability, avoiding possible retribution if it lost out on a project. The NTPC had strong technical skills in power generation because of excellent selection and training schemes. The NTPC benefited from being government-owned, and almost a monopoly at the national level. Its owner gave it special tariff preferences and accelerated depreciation, which bolstered cash flows. Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited declined in the face of aggressive private competition and lack of innovative leadership.
State government-owned SOEs are in worse shape. The best examples are the state electricity boards. They will lose Rs 100,000 crores this year. They allow theft of electricity, give it free to farmers, are headed by itinerant bureaucrats, and engineers hold managerial positions with little training.
Many SOEs are major drains on the productivity of the economy, and make frequent large calls on government funds. Central government investment in the SOEs is now Rs 729,228 crores. Capital employed (paid-up capital+reserves and surplus+long-term loans — mostly from the government) in 2011-12 was Rs 1,328,027 crores. Many SOEs are overstaffed, and labour productivity is low. In 2011-12, the 225 SOEs owned by the government made a net profit after tax of Rs 97,512 crores. They paid out dividends of Rs 42,627 crores, or 3.21 per cent on capital employed, and 43.71 per cent dividend payout. Interest payments were 4.9 per cent on long and short term borrowings, mainly from the government, much less than market rates. Loss making SOEs like Air India, Indian Telephone Industries Limited, BSNL, MTNL and others, lost Rs 27,602 crores. There are large fund infusions for them on the anvil. Plan outlay on SOEs in 2011-12 is estimated at Rs 190,794 crores. Market capitalization of 44 listed SOEs has been declining. Thus, the SOEs contribute little to government finances and make frequent financial demands.
The specious argument is made that the SOEs contribute to the exchequer by way of dividends, various taxes, interest on loans, and the like (total of Rs 160,801 crores), and by employing 13.98 lakhs. Private enterprises can claim similarly.
The hold of the bureaucracy on the SOEs stifles them in procedures and approvals, destroying initiative, and preventing organic and inorganic growth. The SOEs also encourage bureaucrats and politicians to cheat the country, as has been evidenced by many scams (last year, in coal mine allocations, spectrum sales and now in giving away the country’s entitlements in airlines). The money invested by the government in the SOEs today would be better spent on building physical and human infrastructure.
The private sector has the entrepreneurs and managers, and the capacity to raise funds. It could run the SOEs more efficiently, as is proven by those privatized by the National Democratic Alliance government. Abuses can be avoided by strict, independent (not ministerial) regulation, which is fair and consultative, transparent, and up-to-date on market developments. Both private owners and government representatives of government owners can be made to perform and to behave.
A spate of ‘disinvestments’ has seen the government selling small percentages of equity in some SOEs. But they do nothing to improve autonomy, entrepreneurship or transparency in the governance of the SOEs. ‘Disinvested’ SOEs remain under bureaucratic control. The government representatives, unlike the private owner, have no stake to make the SOE efficient and profitable.
Preventing ministerial and bureaucratic interference in the SOEs, putting them under independent regulatory surveillance, appointing career managers to run them, and paying them well, can make the SOEs perform well even under government ownership. Good ‘corporate governance’, and independent regulators like the Reserve Bank of India, Securities and Exchange Board of India, Institute of Chartered Accountants of India, Registrar of Companies, Central Electricity Regulatory Commission, Telecom Regulatory Authority of India and others can ensure more autonomy in the SOEs. Experiments to distance the government from the managements of public enterprises have failed. The principal reasons (apart from the heavy hand of the bureaucracy) for the poorly performing SOEs have been the lack of a holistic management ethos, lack of innovation, poor research and development, and risk tasking.
Some SOEs may need to continue under the State. They must be freed from the bureaucracy. All others must be gradually privatized, not disinvested. Management control should go out of government hands.